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Blowing the motorways budget

By Joshua Arbury, on July 9th, 2011

Yesterday I received from NZTA all the board papers from their May meeting. There are probably a few posts to put together over the next while that share information from those papers, but one that stood out as particularly interesting was an update on how actual transport spending is tracking against expectations laid out in the 2009-2012 National Land Transport Programme. You can read the whole paper here. The NLTP is the most detailed and ‘projects focused’ of the various transport strategies and programmes that are produced: outlining which projects NZTA is to fund over the three year period and how much they expect to spend on each of those projects. Up until recently there was no such thing as a three-year NLTP: but rather budgets were done on a year-by-year basis.

Turning to the update document, the paragraphs below highlight the critical issues: that spending (especially on new state highways) has tracked quite a lot above expectations over the past couple of years, meaning that the money still available for spending in the final year of the NLTP (that is, the current 2011/2012 financial year) is pretty limited:

Along with falling fuel sales (as I outlined in this post recently), it would seem that the ‘above expectations’ spending on new state highways over the last couple of years is the likely reason why projects such as the Hill Street intersection works in Warkworth are now being delayed. This is further expanded upon in the paper:

The second paragraph outlined above is potentially somewhat worrying – that if money from other activity classes (like local roads, roads maintenance, PT spending and walking/cycling spending) isn’t full utilised, then it could be redirected to building more motorways – rather than simply deferred until a later date. From what I’ve read previously, an underspend in public transport, walking and cycling is incredibly unlikely (in fact rumours are that if anything there’s likely to also be an overspend in those areas), so it might be local roads or roads maintenance that misses out.

So how much money are we talking about here in terms of the ‘blown’ state highways budget? Well the graph below sheds some light on that, and as you can see they are some pretty big sums of money:

The dotted line indicates the level of expenditure that was anticipated by the 2009-2012 NLTP, while the grey shaded blocks show the level of spending that actually occurred in 2009/2010 and is what’s anticipated to happen in the subsequent two years. In order for the totals to match up over the full three years there will have to be a pretty dramatic reduction in what gets spent this year: from $1.177 billion down to $908 million.

I suppose that the natural cycle of many of the large motorway projects should assist this process. The big spending on the Victoria Park Tunnel is now largely complete, as is the big spending on the Hobsonville Deviation – which is due to open in the next month or two. While the Waterview Connection is due to start construction within the 2011/2012 financial year, the big expenditure won’t kick in for a couple more years – when the real tunnelling work gets underway.

If we look longer term we really start to get an idea about how tight NZTA’s cashflow is, with any surpluses they once had completely disappearing – it would appear largely as a result of the RoNS projects as time moves on:

What this ultimately means is that if their revenue is lower than expected (as has been the case in recent times) due to higher petrol prices encouraging people to drive less, there’s almost no wriggle room for NZTA to take a bit of a short-term financial hit yet still keep pushing forward with all their projects in the timeframes originally hoped for. We will have to see further projects drop off, with the money simply not being there from NZTA to make them happen.

Which projects or subsidies get the chop and which retain their funding, should revenue from petrol taxes and road-user charges be lower than expected, will be interesting to follow. By blowing the motorways budget in the past couple of years NZTA have certainly left themselves in a bit of a funding predicament for the foreseeable future.

“What this ultimately means is that if their revenue is lower than expected (as has been the case in recent times) due to higher petrol prices encouraging people to drive less, there’s almost no wriggle room for NZTA to take a bit of a short-term financial hit yet still keep pushing forward with all their projects in the timeframes originally hoped for.”

That assumes that every asset with an operational life of 50-100 years has to be paid for during the construction phase. That’s almost unheard of in the private sector… A telecom network or a commercial building is constructed using borrowed money which is then repaid from income over the lifespan of the asset. The trick is to earn some income from the asset, which in transport assets is tolls, fares, or other charges. This is how the Auckland Harbour Bridge was financed. I doubt if anyone in the late 1950s would have looked at the upcoming Bridge project and worried about blowing the budget.

I wonder if the proposed reduction of financial assistance rates is part of the plan to find more money for these motorway projects. Remember this is the May board meeting and the AT and Council documents indicate that the FAR reduction came out of the blue in June.

Clearly this is why Joyce is wanting to pass legislation to allow NZTA to borrow money to build motorways, to enable them to maintain this overspend, with the crunch coming later – after he’s no longer in government- mean future governments will have to deal with the problem.

Indeed rtc. While the rules that require NZTA to work with the money they generate each year certainly have the weaknesses pointed out by Obi above, they do have the strength of limiting the damage that a pork-barrel obsessed transport minister might inflict.

There doesn’t necessarily have to be a problem. If we’d never actually paid back any Harbour Bridge principal and restricted the tolls to paying interest only, then our interest payments this year would be around $1.5m and we could repay the loan for about $30m (including the clip-ons). Small change.

Growth in the economy takes care of most infrastructure debt issues. There is no way I’d even consider paying for something like the CBD Rail Tunnel up front. Why should the people of 2011 pay for an asset that will be enjoyed by the people of 2111? They’ll be much richer than we are, like we’re immeasurably richer than NZers of 1911.

Yay! I agree with Obi, there’s a refreshing change. Exactly. And AC should just get on and borrow to build the thing [the CRL], a deal around interest will almost certainly be met with future governments, and/or road pricing measures.

There is no doubt that petrol tax is not going to grow, this morning’s paper has Peugeot talking about their upcoming hybrid models with 100mpg [that’s miles, folks]. This will have to be met with a change to RUC for every vehicle I guess.

And look out for Joyce to find a way to run up our debt to build these crazy monuments, before slipping off back to the private and straight onto the boards of the companies he is currently subsidising.

“Growth in the economy takes care of most infrastructure debt issues.”

That was the argument used to justify borrowing for public works projects (except highways) from the 1870s through to the 1970s. When the economy stopped growing in the 1970s Rowling and Muldoon panicked and stopped that practice. The decision was partly right because with no economic or population growth there was no growth in demand for housing or electricity or road capacity. It also resulted in prices for those goods being artificially low in the late 80s/early 90s because they only had to cover opex as the old loans had been payed off in the 70s and 80s and no serious attempt was being made to prepare for the existing infrastructure reaching capacity early in the new millenium. Hence the “rates revolts” during the last decade as capex has been funded on the pay-go principal and has been accounting for a steadily increasing proportion of infrastructure pricing.

This brings the proposes reforms of the Land Transport Management Act into focus now. One of the restrictions on tolling at the moment is that it can’t be done in existing roads, but perhaps Govt will look to remove this so that it can start raising revenue sooner.